CASINOS SEEN THROUGH THE REAL ESTATE LENS

Takeaway:ASCA is the most undervalued casino operator under the new valuation paradigm

How the PENN deal could impact other casino companies

Our view here is that the industry has and should receive a step up in valuation. Maybe valuation does matter. Our company specific commentary is below:

ASCA – Slam dunk in our opinion. If there is one stock that should see a permanent valuation bump, it’s ASCA. See our note from Friday. “RE-VALUING ASCA”. Even after the big move, the stock is still trading at a whopping 18% FCF yield.

BYD – If there was ever a stock that could use a valuation bump, it’s BYD. A perennial underperformer, BYD is actually a very cheap stock if you factor in the significant unused real estate. PENN’s deal should shed light on BYD’s 87 Strip acres that are non-producing. However, it seems unlikely BYD could complete a PENN type transaction due mainly to prohibitively high leverage of over 6x. Moreover, BYD has deferred CapEX and continues to spend well below normal on maintenance CapEX. That is unsustainable.

ISLE – At 6x leverage, it is unlikely ISLE could pull something off similar to PENN anytime soon. However, they are in harvest mode, so debt pay down will occur fairly quickly. We estimate that by the end of 2014, leverage will fall to about 4.5x and at that time they could consider a REIT spin-off.

LVS – Highly unlikely to pursue a PENN type transaction for a few reasons. First, LVS maintains a deep backlog of potential developments that just doesn’t make sense within a REIT format. In addition to Lot 3 in Macau, other Asian countries are likely to expand or open up to casinos and LVS is probably the most desirous operator because of its MICE focus. Second, LVS generates most of its profits in international jurisdictions with significantly lower tax rates than in the US. In fact, LVS pays almost nothing in corporate taxes in Macau. The international exposure bites into the tax efficiency benefit of the REIT structure. Finally, we don’t believe Sheldon would want to give up any control which he would have to do in a property company.

However, the new focus on real estate should be a positive for LVS’s valuation. LVS owns malls in Macau and Singapore that are worth a lot more to a separate real estate focused entity than the market is valuing them within LVS. We would expect investors to begin to re-value LVS (again) using current cap rates on the Mall portfolio. More on this later.

MGM – Just too much darn leverage. The REIT structure probably cannot be pursued by this company. However, with its low cost of capital, the new PENN PropCo should become a more aggressive buyer of casino assets. We know MGM is a willing seller and PENN has been interested in The Mirage in the past. So MGM could benefit from the PENN transaction.

PNK – We think PNK is a great candidate for a REIT split. While leverage is a little high at over 5x, they should be able to pay down debt fairly quickly with the opening of Baton Rouge behind them. In fact, the PNK situation is very similar to ASCA’s with one potentially major difference. We wonder if this management team still views the company as a development company. They’ve made a push in Vietnam and may be pursuing other growth opportunities. We would rate the likelihood of PNK converting to the PENN structure to be lower than ASCA's.

WYNN – While leverage is low, we think the WYNN is an unlikely candidate for many of the same reasons as LVS.

CZR - Similar to MGM, CZR is way too leveraged in its current form for this to really move the needle for them (as an equity holder at least). They can sell a few assets at higher multiples but their leverage is over 10x

Share

Print

11/19/12 07:11 AM EST

THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – November 19, 2012

As we look at today's setup for the S&P 500, the range is 29 points or 1.83% downside to 1335 and 0.30% upside to 1364

SECTOR AND GLOBAL PERFORMANCE

EQUITY SENTIMENT:

CREDIT/ECONOMIC MARKET LOOK:

YIELD CURVE: 1.37 from 1.34

BONDS – the US Treasury market has not and could not care less about Equity emotions flickering on the futures tick; 10yr at 1.60% this morning remains in a Bearish Formation; Bonds remain in a Bullish Formation, despite High Yield and IG debt underperforming last wk (HYG looking interesting short side for the 1st time in a long time).

EUROPE – Europe is picking up +1.1% of last week’s -2.7% decline in the EuroStoxx600; big damage done on that move as TREND lines snapped across the board; so watch the DAX from here as its TREND line of 7116 is one of the most important on my screens for Equity risk, globally; covered our Spain short on Friday, making us 16 for 17 (all-time) on the short side.

Known Unknowns

This note was originally published
at 8am on November 05, 2012 for Hedgeye subscribers.

“By knowing more about what we don’t know, we may get a few more predictions right.”

-Nate Silver

First, my prayers go out to the 2 million Americans who are still without heat this morning on the East Coast. I am part of the 14% without power in Westport, CT. It’s getting colder. If you have the means to help others, please do.

Predictions, about the weather, politics, and markets, can get you in trouble; especially if your own money is behind your opinion. I guess the upside to being a partisan political pundit is that you’ll probably be gainfully employed regardless of your predicted outcomes. Right or wrong, someone will probably send you a sticker for effort; particularly if you drove ad revs.

From my model’s vantage point, markets have been predicting a closer election than the “expert” polls have been predicting for months. The recent strength in the US Dollar reflects Romney narrowing the gap. Whether or not he can beat Nate Silver’s Obama odds is something neither of us know. After all, that’s the conclusion of Silver’s book (The Signal and The Noise) – don’t trust the polls.

Back to the Global Macro Grind…

Last week, the US Dollar Index was up another +0.65%. It has only had 1 down week in the last 7 and is now breaking out from an immediate-term TRADE duration perspective (after holding its long-term TAIL line of $78.11 support).

Nate Silver’s model doesn’t account for this, but those of you who trade markets do. The causality behind a Debauched Dollar has been weak fiscal and monetary policy. Heightening probabilities of Romney not getting crushed raises the probability that Ben Bernanke and Tim Geithner will be employed by Citigroup by 2014. That’s been Dollar Bullish, on the margin.

The Known Unknown here is that we don’t know who will win this election, but:

If Obama wins, the US Dollar probably goes down from here

If Romney wins, the US Dollar probably goes up from here

The key word in those Bayesian (conditional probability) statements is probably. Probably doesn’t mean certainly. If neither holds true (what if they tie?) markets could have a tough time digesting what to do next. Like it or not, all the quant machines are trading Correlation Risk, in size.

Causality doesn’t always drive correlation; sometimes it does – and big time. For the last 3 months (90 day Correlation Risk model), here are the inverse correlations between the US Dollar Index and the Big Beta driving your portfolio performance:

SP500 = -0.91

Eurostoxx600 Index = -0.97

MSCI World (Equities) = -0.94

CRB Commodities Index = -0.62

Copper = -0.88

Gold = -0.97

Yes, these intermediate-term TREND correlations are surreal. Which makes it likely that if Obama wins, you want to buy the living daylights out of Gold and European Stocks. If Romney wins, you want to respect the likelihood of known knowns (correlations) continuing.

Like my not having power for 6 days, legitimate TAIL risk is defined by the unknown unknowns. I didn’t know that was a known unknown until maybe 2 weeks ago. Risk happens fast.

Known knowns: for the last month, here’s what Strong Dollar has been doing to Bernanke’s Bubble (Commodities):

Bernanke has been at the helm of the Federal Reserve for 6 years. He has never raised interest rates. Never is a long time. So, that’s another Known Unknown to consider here that the market doesn’t yet consider a legitimate risk – what it means for the bond market.

If Romney wins but:

A) He appoints Glenn Hubbard as his Fed Chief

B) He appoints John Taylor as his Fed Chief

There are 2 very different possible outcomes for the US Bond market overall. Don’t forget, Hubbard is a hard core Keynesian - he could very well make Romney look like Bush, fast. Taylor would raise rates – and could scare the bond market, faster!

On the economy, it’s not a secret that I don’t think Obama is a good President. I didn’t think Bush was either. From a US fiscal and monetary policy perspective, those are known knowns in my model. Whether Romney can be any worse is an unknown.

the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

THE WEEK AHEAD

The Economic Data calendar for the week of the 19th of November through the 23rd is full of critical releases and events. Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.

Share

Print

11/16/12 04:06 PM EST

Weekly European Monitor: R is for Recession

Takeaway:No great compromise or roadmap in Euro-land ahead.

-- For specific questions on anything Europe, please contact me at to set up a call.

Fixed Income: The 10YR yield for sovereigns were mostly down week-on-week. Greece declined the most at -49bps to 17.38%, followed by Italy -12bps to 4.88%, Portugal -8bps to 8.78%, and France -6bps to 2.07%. Spain saw the largest gain at +6bps to 5.89% and Germany gained +2bps to 1.35%.

Our call - the EUR/USD will trade within our quantitative levels and reflect much of the daily headline risk (from Spain, Greece, and Italy in particular), however ECB President Mario Draghi’s September announcement that “the ECB is ready to do whatever it takes to preserve the euro” and the resolve of Eurocrats to maintain the Union will prevent levels falling anywhere near parity.

We believe there is a high likelihood that no significant policy action comes in the remaining weeks of 2012, which could support the band the cross has been trading in over the last weeks.

R is for Recession:

It came as little surprise this week but the Eurozone officially moved into recession with preliminary Q3 GDP showing a -0.1% contraction quarter-over-quarter following a -0.2% contraction in Q2.

Now the task is sorting through the timing of an eventual recovery, which we think could have a long runway.

Where We Are At?

Eurozone Finance Ministers agreed to allow Greece to implement its austerity program over 4 years instead of 2 years this week but postponed a decision on the next tranche of Greek aid (€31.5B) until either next Monday’s Eurozone Finance Ministers Meeting or Thursday’s EU Summit. A big point of contention is the rift between the IMF and Eurogroup over Greece’s debt reduction schedule. The IMF wants Greece’s debt to fall to 120% of GDP by 2020 while the Eurogroup says by 2022. While cohesion is needed, what’s more disturbing is both parties will set a target that they both know Greece has no chance of attaining.

Further, the IMF continues to push for an official debt restructuring, while the Eurogroup has rejected the haircut option. It appears the path of least resistance might be improving financing rates and lengthening the maturity of the loans.

Longer-term we believe there is a high likelihood that no significant policy action comes in the remaining weeks of 2012. As a reminder, some of the main topics that Eurocrats are wrestling with are:

Setting up a Banking Union (with Pan-European Deposit Insurance)

Setting up a Fiscal Union

If and when Spain will request another bailout (and will it come from the IMF or ESM, or both?)

In terms of setting up a Banking Union and Fiscal Union, we believe the two are dependent on each other. While more attention has been given to a Banking Union recently, we believe Eurocrats reaching an agreement on a Fiscal Union over the near term is incredibly unlikely as countries are unwilling to part with their fiscal sovereignty. This could be one factor to put downside pressure in the cross.

On Spain, we think the sovereign asking for a bailout is a question of when and not if. The recent rumor that Spain may look to the IMF for a loan would reflect the likelihood of more favorable terms versus the European Commission and ECB’s ‘conditionality’ for aid via the ESM or OMT.

Beyond the headline news, and broader negative data out this week (see below in the section “Data Dump”), there were a couple of charts that caught our attention this week:

DEC 12-13 – First public consultation between the Russian government, B20 Coalition and international civil society representatives on G20 agenda for 2013 (in Moscow)

DEC 20 – ECB Governing and General Council Meeting

APR 2013 – Parliamentary elections in Italy

MAY 2013 – Presidential elections in Italy

Call Outs:

European Day of Action and Solidarity – unprecedented and coordinated cross-border protests against austerity measures on Wednesday with 40 unions participating across 23 countries (strikes mainly in Italy, Spain, Greece, and Portugal).

Spain - El Confidencial, without citing sources, reported that Spain is considering requesting a credit line from the IMF as an alternative to a European bailout. The paper highlighted the support for Spain recently expressed by both President Obama and IMF leaders, along with concerns about Germany's resistance to additional funding for Spain and its continued insistence on austerity prescriptions.

Spain - the government passed a decree to prevent low-income families being evicted for defaulting on their mortgages, and plans to create a stock of homes that can be rented out cheaply.

Banking Union - some hawkish comments on the proposed banking union from ECB governing council member (and Bundesbank President) Jens Weidmann in a guest column in the German financial daily Handelsblatt. He said that establishing the ECB as the single supervisory mechanism risks compromising the central bank's primary goal of price stability. He also noted that a banking union should not be rushed, while adding that it would need a resolution mechanism that should be funded by the banks themselves, and not by European taxpayers. In addition, he argued that legacy risks should be the responsibility of respective member states.

DEBT CEILING UPDATE: WILL SANTA’S SACK BE FILLED WITH COAL?

Takeaway:We are likely to hit the Debt ceiling right around Christmas day; that may be used politically to hamper or delay Fiscal Cliff negations.

SUMMARY BULLETS:

Our analysis suggests we are likely to hit the Debt ceiling right around Christmas day. More specifically, the US Treasury is on pace to breach the Debt Ceiling on 12/24 in Scenario A (the average pace of daily net debt issuance for business days during FY13) and on 12/26 in Scenario B (the average pace of daily net debt issuance for business days during FY11-FY13).

It may be that the Treasury dramatically slows or stops issuing new debt altogether around Christmas time, but the point remains: the US government is likely to breach its Congressionally-imposed $16.394 TRILLION Debt Ceiling right around then. Notably, this late-DEC estimate is a bit shy of our previous projection of JAN ’13.

The paramount implication of a late-DEC Debt Ceiling breach is that it would likely give the GOP – particularly House Republicans – bargaining leverage in any fiscal cliff negotiations. To some extent, one could’ve argued that the public handed the leadership conch to the Democrats based on the recent election results, but a renewed Debt Ceiling impasse could actually strengthen the Party’s resolve in any Fiscal Cliff negotiations.

On the margin, that would be negative for US GROWTH over the intermediate term to the extent any cliff resolution is delayed and/or thwarted outright.

While much Manic Media attention has been given to Fiscal Cliff negotiations in recent weeks (and rightfully so), we on the Hedgeye Macro Team continue to warn clients that the timing of the Debt Ceiling breach dramatically lowers the probability of a “grand compromise” that we think the throng of investors that remain bullish on the equity market is likely hoping for.

As an aside, per the latest BofA/ML fund manager survey, hedge fund net exposure to equities at 40% is the highest since JUN ’07 – coincidentally right around the last time we saw the corporate earnings cycle roll over like we are seeing today (refer to our Q4 Macro Theme of #EarningsSlowing for more details).

Per everyone’s favorite Treasury Secretary Tim “The ‘Tools’ Man” Geithner, “the government could bump into its borrowing limit before the end of the year”, though he was quick to remind the audience that “the Treasury has enough tools to keep the government afloat into early 2013”.

We’ll take his word on the latter part of his statement, as we learned from MAY 16, 2011 to AUG 2, 2011 (~2.5 months) that the Treasury Secretary does indeed have a robust bag of tricks to help the government stave off a technical default. As a reminder, those tools include (but are not limited to):

Declaring a “debt issuance suspension period”;

Suspending (until further notice) the issuance of State and Local Government Securities;

Prematurely redeeming existing Treasury securities held by the Civil Service Retirement and Disability Fund;

Suspending new issuance of Treasury securities to that fund as investments;

Suspending the daily reinvestment of Treasury securities held by the Government Securities Investment Fund of the Federal Employees Retirement System Thrift Savings Plan; and

Suspending the daily reinvestment of Treasury securities held as investments by the Exchange Stabilization Fund.

It’s worth noting that each of these steps is overwhelmingly benign as it relates to any implications for the economy and/or financial markets. To the extent you’re interested, however, or would like to brush up on historical Debt Ceiling impasses for any clues as to how this one may play out (1985, 1995-96, and 2002-03), please review our MAY 11, 2011 note titled: “FEAR MONGERING MEETS BRINKSMANSHIP: A COMPREHENSIVE GUIDE TO NAVIGATING THE DEBT CEILING DEBATE”. The conclusion of that note was as follows:

“We expect the current debt ceiling debate to heat up substantially in the coming weeks, resulting in a measured pickup in volatility across global financial markets, primarily as a result of increased volatility in the US Dollar being driven by the whims of D.C. politicking. Further, we expect the debt limit to be increased prior to any sort of default on any of the federal government’s obligations. And within that legislation, we would expect to see the groundwork laid for potentially meaningful fiscal reform ahead of the FY12 budget debate – an event that is likely to prove dollar bullish when it’s all said and done.”

With the looming Fiscal Cliff (inked back in late JUL ’11; ~$8 TRILLION in tax hikes and spending cuts over the long term) posing as “the groundwork laid for potentially meaningful fiscal reform” and the US Dollar Index up about +8% since publication (in spite of now-perpetual QE and Bernanke perpetually kicking the can down the road on interest rate hikes), that call has proved to be rather prescient.

Jumping ahead to the current Debt Ceiling showdown, we do not take Geithner’s words on the timing of the upcoming breach at face value. Rather, we conducted our own analysis that suggests we are likely to hit the Debt ceiling right around Christmas day. More specifically, the US Treasury is on pace to breach the Debt Ceiling on 12/24 in Scenario A (the average pace of daily net debt issuance for business days during FY13) and on 12/26 in Scenario B (the average pace of daily net debt issuance for business days during FY11-FY13).

It may be that the Treasury dramatically slows or stops issuing new debt altogether around Christmas time, but the point remains: the US government is likely to breach its Congressionally-imposed $16.394 TRILLION Debt Ceiling right around then. Notably, this late-DEC estimate is a bit shy of our previous projection of JAN ’13.

The paramount implication of a late-DEC Debt Ceiling breach is that it would likely give the GOP – particularly House Republicans – bargaining leverage in any fiscal cliff negotiations. To some extent, one could’ve argued that the public handed the leadership conch to the Democrats based on the recent election results, but a renewed Debt Ceiling impasse could actually strengthen the Party’s resolve in any Fiscal Cliff negotiations. On the margin, that would be negative for US GROWTH over the intermediate term to the extent any cliff resolution is delayed and/or thwarted outright.

Per House Minority Leader Eric Cantor this week:

“Resolving the issues surrounding the fiscal cliff, especially the replacement of the sequester, and the next debt limit increase will require that the president get serious about real entitlement reform.”

Moreover, House Speaker John Boehner was out earlier in the week saying he would not allow Congress to duck tough decisions with another round of short-term measures. To the extent he holds the GOP true to his words, we could be looking at one messy political showdown in the coming weeks – especially if the Republican Party continues balk at any revenue increases outside of “dynamic scoring” (i.e. closing loopholes and reducing deductions).

As if Washington D.C. wasn’t messy enough…

Darius Dale

Senior Analyst

Share

Print

Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.

Thank You!

Your request has been received

You have been added to our list and will receive an email shortly.

If you do not receive an email, please check your spam filter, and then email
support@hedgeye.com.
By joining our email marketing list you agree to receive emails from Hedgeye. This is a distinct and separate service form any of our paid service products. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.